Income Redistribution's Logical Conclusion Is Communism

Income inequality is dominating the economic news cycle at the moment with multiple stories about rising income inequality, the need to raise the minimum wage, and anecdotal stories designed to make the more fortunate feel sorry for the less so. There are, however, two big problems with this narrative. First, most of the income inequality stories are false. Second, once you admit that income redistribution is fair, there is no logical stopping point short of communism.

Starting with the income inequality debate, the main problem is that most stories are based on pre-tax and pre-transfer income. If you look at that data, yes, income inequality in the U.S. has gotten quite a bit worse under President Obama. Does that mean we should blame him for this? No. Because if you look at the income data after taxes and government transfers (that is, after all the income redistribution that we do), the picture is completely opposite.

When we analyze U.S. income data after taxes and after government transfer payments, we find that inequality has actually dropped slightly since 1993. Using the data after all the income redistribution also shows much healthier growth in the average family’s income, with a 62 percent gain after adjusting for inflation from 1979 to 2007 according to this CBO report.

We certainly still have income inequality in America, but the current income redistribution programs are doing an excellent job of holding it in check. Instead of complaining, President Obama should take a bow; he can finally claim success on something.

Moving to the second issue, how is a society supposed to decide what is “fair” as far as income redistribution goes? This is a question both difficult and simple. Logic suggests that you can only defend two possible answers: we should do no income redistribution or we should redistribute income until such time as everybody is left with exactly the same amount of money (essentially communism). While almost everyone wants the answer to be somewhere in the middle, it makes no sense to stop there once you start.

The government today is essentially divided into two parts: one that provides services and another that redistributes income. The smaller part is the branch that provides services (national defense, parks, courts, museums, and interstate highways, to name a few). This makes up about 30 percent of federal government expenditures. The other 70 percent is transfer payments, which means programs where the government takes money from one person and transfers it to another. This includes Social Security and Medicare which would not be income redistribution programs if the government was actually paying out benefits to today’s retirees using the money they paid in while working, but it is not. Today’s beneficiaries are getting money taken from today’s workers, so these two supposed insurance programs are really just two more in a long line of income redistribution programs that make up the bulk of what the federal government does.

If the majority of federal government expenditures are transfer payments—redistribution of income—then the important question which has been lacking from any meaningful political debate is how much income should be redistributed. We debate whether to extend emergency unemployment payments (welfare under a more palatable name), we debate the level of spending on food stamps, and we debate the merits of the free cell phone program the government runs, but we never get to the key question.

Raising the minimum wage is one of the top issues of the moment, yet the redistributive properties of such policies have been little discussed. Proponents like to believe it will redistribute money from rich business owners to poor low-wage workers. Yet some share of the minimum wage hike will be a redistribution of income from customers to the workers. Depending on the business, the customers may be just as poor as the workers. How much of the workers’ gains would come from business owners and how much from customers is unknown and would vary on a business-by-business basis.

We have endlessly debated Obamacare, but almost exclusively in the context of whether it would function or the constitutionality of the insurance mandate. Obamacare represents another, enormous income redistribution program (this time from the rich, the young, and the healthy to the poor, the near-elderly, and the sickly). Yet, we have not spent much time debating whether more income redistribution is needed or is fair. So, having shown above that we appear to have sufficient income redistribution programs in place to have slightly lessened the income inequality in American society, let’s talk about what is “fair.”

One perfectly defendable position is that no income redistribution is fair because people have a right to their own property (of which your money is part). That does not mean that people should not pay taxes that go toward the general provision of the public goods like national defense and interstate highways, but, rather, that taxes beyond that are not appropriate. This is essentially a libertarian viewpoint and would result in a much smaller government and reliance on private charities for the social safety net.

A person holding this position could even believe that the taxes to fund the non-transfer government programs should be progressive. A progressive tax structure to pay for the government programs that do not redistribute money could be considered “fair” while taking money simply to give it to somebody else is simultaneously considered “unfair.” Thus, the poor might pay no taxes, while the rich pay virtually the entire cost of this (smaller) government.

A second, defendable position is that income redistribution is fair because the marginal value of extra income is less for high earning or wealthy people than it is for the poor. Such a position is based on the philosophy of John Rawls, that social welfare is increased when the least well off among us is made better off. If you hold this position, though, why do we stop when one out of every six Americans is still officially living in poverty?

If the country’s social welfare is increased by income redistribution, the logical conclusion is that it would be increased more if we kept on redistributing the income until everybody was left with the exact same amount of money. Otherwise, there are still people with more and those people will be getting less benefit from their money than a poorer person could if we would only redistribute it.

Thus, if you favor income redistribution, the optimal amount of income redistribution is to keep going all the way to communism, where we all get the same amount. Why do most people not support this? I think it is because when taken to the logical extreme, people feel it would be unfair to completely equalize incomes, perhaps even a little silly. They may also realize that people will not work hard (or at all) under such a system and we will all end up poor. Yet, that is the more defensible position.

To stop part way means that the government knows how much extra, unneeded income those rich people have. Government can tell just how much it can take away from the rich without hurting them too much. Government also apparently knows when it has helped the poor enough by giving them money and other benefits so that their gains from further redistribution are not sufficient to justify any more.

Clearly, these propositions are not true. Instead we have some sort of messy political and social compromise where we agree to empower our government to steal a reasonable amount of money from the rich in order to give to the poor. We strive not to be too harsh on the rich or too generous to the poor. This may be a democratic solution, but it is philosophically incoherent. It is like saying burglary is okay as long as the thief steals only the television while leaving the jewelry untouched.

Once you realize that the amount of income redistribution chosen is completely arbitrary, you might begin to see the ridiculousness of the policy. Government cannot justify taking from the rich and giving to the poor simply because it has the police power to do so. The justification gets even weaker when government only does it halfway. Pure libertarianism and pure communism at least make logical sense. Our current system falls short of everyone’s ideals. It is a classic political compromise that makes nobody happy.